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Global CFO Signals: A Runway for Growth

For several quarters now, CFOs globally have shared similar concerns—in particular, where the European and Chinese economies were headed and what effect the crises in the Middle East and the Ukraine would have on future growth. With some of those fears tempered and others being managed, many CFOs have the opportunity and wherewithal to focus on corporate growth. And judging by the results of the 17 countries reporting in the Q1 2015 edition of Global CFO Signals report from Deloitte Touche Tohmatsu Limited (DTTL), many intend to take advantage of the opportunity.

The evidence is apparent in the strength of sentiment in several countries. In Australia, for example, CFO optimism has rebounded solidly in the wake of the lowering of interest rates in February. The number of CFOs in Spain reporting higher optimism (71%) reflects perceived continued momentum in that country’s economy. And in North America, CFOs recorded their ninth consecutive quarter of positive net optimism.

That optimism is translating into growth strategies, particularly through organic means, in several countries, including Ireland and Italy. And positive revenue expectations can be seen among most countries reporting. Topping the list is the U.K., where 82% of CFOs expect an increase—well above their long-term average.

As is common, there are some problem areas. In Switzerland, for example, where many CFOs were taken by surprise by the recent removal of the exchange-rate floor, a net 80% now rate the level of uncertainty as high. In Norway, CFOs are troubled by low oil prices, and in other countries economic uncertainty still weighs heavily.

Dr. Ira Kalish

“Overall, however, there have been some very positive signs on the European economy in the wake of the European Central Bank’s easing of monetary policy,” notes Dr. Ira Kalish, chief global economist for DTTL. In addition, he says, “the big drop in oil prices has reverberated positively throughout most of the global economy.”

Still, Dr. Kalish notes, there are reasons why levels of uncertainty are on the rise among CFOs this quarter, including the direction of the U.S. dollar, demand in overseas markets, such as China, and government policies. In the U.K., for example, uncertainty about post-election reforms was seen as the greatest threat to U.K. business, according to that country’s CFOs, who were surveyed before the voting. It’s one reason defensive strategies, such as cost cutting and increasing cash flow, reemerged as top priorities there—and never seem to go out of favor among CFOs.

Results by Region

How does CFO sentiment in Q1 2015 break down? And who will take advantage of the current runway for growth? Following is a synopsis by region.

Americas

The streak continues in North America: net optimism now sits at its second-highest level during a nine-quarter positive run. Moreover, emboldened by the strength of the region’s economy and the prospects for that economy, CFOs indicated their highest-ever bias toward growing revenue over cutting costs and toward investing cash over returning it to shareholders. And that confidence is translating into domestic hiring expectations, which now stand at 2.4%, matching the highest levels seen in four years. The tumultuous quarter in the energy sector, however, contributed to a dip in sales expectations, which fell to 5.4% from 6.0% the previous quarter. Capital spending expectations also declined slightly from 5.5% to 5.2%, but earnings expectations rose from 9.7% to 10.6%. On the other hand, in the one South American country reporting—Argentina—CFO outlooks remain tempered due to an apparent lack of confidence in the government’s ability to enact effective economic policies.

Australia and New Zealand

After three sluggish quarters, Australia’s CFOs are feeling much more upbeat with net optimism at 21%, up from 6% in Q4 2014. Driving that trend is a lower Australian dollar and record low interest rates, with more than 90% of CFOs now expecting the dollar to sit at or below US $0.80 in 12 months’ time. In addition, even though uncertainty is up, more than half of CFOs believe now is a good time to take on risk—up 24%—perhaps because policy uncertainty and a slowing China haven’t negated the strong underlying drivers of “lower for longer” interest rates and a falling exchange rate. Meanwhile, in nearby New Zealand, the third annual CFO survey finds finance chiefs optimistic, but a little less so than a year ago. And while they are bullish on both their country and companies, their main strategies for expansion are very much linked to growing existing businesses through organic expansion and the introduction of new products or markets.

Europe

Not surprisingly, there is much diversity across Europe. Spain’s CFOs, for example, are the most optimistic (net 67%) reflecting improvements in that country’s growth prospects following a double dip recession. At the other end of the spectrum, Switzerland’s CFOs are the least optimistic (net -58%) thanks to the appreciation in the Swiss franc. What CFOs seem united on, though, is that uncertainty is on the rise. CFOs in all major European countries surveyed, except Ireland and Norway, see a greater level of financial and economic uncertainty facing their businesses. In response, defensive strategies are particularly in favor in Europe, and cash is listed as a concern among nearly all countries surveyed. That is not taming their business expectations, however.

Most CFOs (except Switzerland’s) report strong expectations for revenue—particularly in Belgium, Germany, Ireland, Italy, Spain and the U.K. Ireland’s CFOs also are reporting solid increases in capital spending and hiring. Going forward, the CFOs also seem to know what measures should be taken to increase their prospects and resolve the current euro area growth crisis. In a special question asked in the inaugural European CFO Survey, the CFOs favored an increase in national structural reforms followed by an increase in public/pan-European investment spending. For more information, view the complete report at www.deloitteresearchemea.com.

Other Report Highlights

Risk—Appetite for risk is highly relative this quarter. In the U.K., a solid 51% of CFOs say now is the time to take greater risk onto their balance sheets—but that is actually a two-year low. The figure also stands at 51% in Australia, but that is a marked improvement fueled by the recent lowering of interest rates. And while just under a third of Germany’s CFOs cite an appetite for risk, that’s the highest level in three years. Meanwhile in Austria fears of increased regulation, among others, have led to the lowest level (11%) in this survey.

Uncertainty—Uncertainty continues to cause consternation. The CFOs of Germany and Switzerland, two countries that have historically benefited from overall stability, perceived the highest levels of uncertainty, at net 82% and 80% respectively. In Australia, uncertainty remains high despite the positive influence of lower interest rates and a weaker Australian dollar. Much lower levels were reported by CFOs in Italy, Norway, and Ireland, where a net 9% of CFOs view the external environment as uncertain, down from 55% last quarter.

Metrics—Revenue expectations remain solid. Some 82% of CFOs in the U.K. and Italy expect their revenue to rise in the next 12 months as do 79% of Australia’s CFOs. Moreover, half of Sweden’s CFOs say their companies can grow 4% to 6% in that time. Positive margins outlooks are also reported in Italy (77%), Finland (65%), and Belgium (62%), among others. In Switzerland, however, the exchange-rate situation has CFOs rethinking forecasts: just 17% expect revenue to rise, and there is a sharp decline in margin expectations.

Hiring—Globally, the news on the job front is somewhat encouraging. Domestic hiring expectations in North America, for example, rose to 2.4%, matching their highest level in two years. In Ireland, 70% of CFOs surveyed expect employee levels to increase over the next 12 months, as do almost 40% of Australian CFOs. In Switzerland, however, 59% of finance chiefs expect the number of employees in their companies to decrease in the next 12 months, and 25% of Finland’s CFOs expect cuts domestically in the next six months.

Corporate strategy—Many CFOs continue to eye growth. North America’s CFOs indicate their highest-yet bias toward growing revenues and investing cash. In Ireland, 82% of CFOs believe their company’s strategy is expansionary, particularly through organic means. Meanwhile, other countries, such as New Zealand and Italy also cite new product and new market introductions. Still, the importance of defensive strategies remains strong.

M&A activity—The ingredients for increased M&A remain: strong balance sheets, available financing and perceived opportunities. Some 96% of the Netherlands’ CFOs expect M&A activity to increase in the next 12 months, as do 83% of Spain’s, and the number is 67% among Finland’s CFO if you add in divestitures. In Belgium, 40% of CFOs have expansion through M&A activity on their list of business priorities.

About Global CFO Signals Survey

The purpose of Deloitte Touche Tohmatsu Limited’s Global CFO Signalsreport is to provide highlights of recent CFO survey results from Deloitte member firms. This issue includes the results of the first-quarter 2015 CFO surveys from Deloitte member firms in the following geographies: Argentina, Australia, Belgium, France, Finland, Germany, Italy, Netherlands, New Zealand, North America, Norway, Spain, Sweden, Switzerland and the United Kingdom. See page 31 in the report for member firm contacts and information on the scope and survey demographics for each survey.

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